HDFC Life Insurance Company has been in a strong uptrend, giving positive returns for 4 straight months since March. The stock has surged 35 percent in this time. It has risen over 11 percent in June so far after another 12 percent jump in May. Meanwhile, it added 6 and 2 percent in April and March, respectively. However, the stock lost 15 percent in February.
It has advanced 16 percent in 2023 YTD and 12 percent in the last 1 year.
On the back of the recent gains and strong growth outlook, brokerage house Kotak Institutional Equities has retained the insurance stock as its ‘conviction buy’.
The brokerage finds the company investing aptly to grow lower ticket business and sustain growth in high-margin retail term; it seems firmly on track to deliver mid-teen (ex-one off) annual premium equivalent (APE) growth for the year. It has a target price of ₹820, indicating an upside of 30 percent.
As per the brokerage, a key positive for the stock is that its parent HDFC Bank will be an important enabler.
Kotak Institutional Equities noted that HDFC Life expects to increase its share in HDFC Bank to 70 percent from the decline to 55 percent last quarter. While the company has not spelled out any timeline for the same, Kotak expects gradual improvement over the next few years.
It further pointed out that about 40-45 percent of total insurance employees seated in HDFC Bank’s branches are from HDFC Life. Management highlighted that they will benefit from new branch additions (1,479 branches added by HDFC Bank in FY2023) and will increase its workforce in the bank over time, stated the brokerage.
Further, Kotak mentioned that the bank has focused targets across parameters, including liabilities growth and para banking. But the management believes that the focus on deposit mobilization (accelerated due to the merger of HDFC-HDFC Bank) will not derail its strategy to grow insurance distribution. The latter is a strong fee-earning avenue for the bank and becomes crucial when other revenue lines are under pressure, added Kotak.
Also, it highlighted that HDFC Bank has typically delivered 17-19 percent growth in the insurance business. HDFC Life, for now, expects growth at HDFC Bank in line with the rest of the business, i.e., at mid-teen levels. However, it cautioned that assuming the above builds in some counter-share gains as well, HDFC Life’s growth expectations from the bank are conservatively low at this stage.
Comfort and conviction; BUY
"HDFC Life has guided for faster-than-industry growth in the medium term, driving mid-to-high teen VNB growth. The company is preparing for a new regime of lower tax benefits (or no tax benefits) and a shift to lower tickets, in line with the regulatory objectives. Apart from growth in the business at HDFC Bank’s counters, the company continues to grow other channels aggressively, with an increase in the proprietary agency to 22 percent by Q1FY24E from 20 percent in FY23 and 14 percent in FY22; this is likely augmented by the acquisition of Exide Life," said the brokerage.
However, the aforesaid strategy, along with investments in technology, would likely lead to flat margins. Thus, despite the Street’s concerns about the business trajectory after the budget, Kotak expects HDFC Life to deliver healthy (16 percent, ex-one off, 7 percent overall APE) growth in FY2024E, followed by a stable trajectory over the medium term.
It remains Kotak's favored life insurance pick.
